Many aspiring leaders take conventional routes to the top in business: They get on a C-suite track at a large company, climb the ladder to partnership at a consulting or investment firm or launch their own startup. But there is another career path that has become increasingly popular in recent years: buying and running an existing operation — or what we call acquisition entrepreneurship.
Whether acquisition entrepreneurship is right for you depends on your preferences and temperament. But most of the individuals we’ve taught, advised and tracked have found it to be personally, professionally and financially rewarding.
Perhaps the biggest benefit is an instant impact. Instead of navigating a corporate bureaucracy or toiling away on business plans and prototypes, you’re immediately in charge of a living, breathing organization and making decisions that have consequence. Another plus is having a more flexible lifestyle than might be possible at a fledgling startup or a large firm.
But small-business acquisition and management is not without its challenges. That’s why you need to make sure you’re suited to it and then approach your search, deal negotiation and transition to leadership in a systematic way. Through our research on multiple companies and their buyers, we’ve developed a road map for tackling all of these steps.
REFLECTION
To succeed at acquisition entrepreneurship, you, of course, need basic management skills: an understanding of finance, a knack for leading and managing others and an aptitude for decision-making. But you need other attributes, too.
Confidence and persuasive ability are key; the job requires you to reach out and project optimism to people you don’t know. Persistence is crucial, too. You need the fortitude to bounce back.
Perhaps most importantly, you should be an enthusiastic learner. Throughout your search, you’ll have to quickly get up to speed on unfamiliar industries, sectors, and companies.
It’s also important to reflect on the trade-offs that all entrepreneurs make in choosing to go out on their own: Do you value what you’ll gain more than what you’ll lose? For example, you’ll have professional independence and the ability to make unilateral decisions, but that comes with a great deal more pressure.
Carefully consider what you’re in for. If you determine that you have the skills and the appetite to become a small-business owner, you’re ready to begin your search.
THE SEARCH
Although would-be entrepreneurs often worry about making mistakes once they take over a business, it’s actually much earlier that much falter. According to research by a team at Stanford University, about a quarter of acquisition searches end without a successful purchase. We’ve focused on avoiding these outcomes in our work advising former students. Here’s what we suggest.
Commit to searching full time for six months to two years. An extended period is necessary to raise funds from investors, identify potential acquisition prospects, thoroughly vet the best of them, negotiate with sellers and, eventually, find one that agrees to sell at a reasonable price. Then it will take at least three more months to perform due diligence and complete the transaction.
The search begins by sourcing and filtering prospects. We recommend focusing on companies with annual revenues of $5 million to $15 million and annual cash flows of $750,000 to $3 million. Forget rapidly evolving startups and risky turnaround opportunities; you should look for steady enterprises that are profitable year after year and likely to remain so — what we call enduringly profitable.
In a typical search, you’ll encounter acquisition prospects every day — through referrals from your network or through your own direct outreach to business owners. We recommend that you evaluate each using five criteria:
— Is it profitable?
— Is it an established business?
— Are its revenues and cash flows in the desired range?
— Do you have the skills to manage it?
— Does it suit your lifestyle (location, hours, need for travel)?
If you can answer yes to all of the above, ask two additional questions:
— How enduringly profitable is the business?
— Is the owner serious about selling it?
Markers of enduring profitability include a loyal customer base; a strong reputation; large switching costs; and few or no competitors. Examine the financials carefully and look for strong margins and low customer churn.
If a business owner has engaged a broker, it’s a good sign that he is ready to sell. But it’s not uncommon for people to back out at the last minute. To counter this risk, spend time with potential sellers as early as possible to investigate their motives. Are they retiring? Have they had a life change that requires them to give up the business?
NEGOTIATING A DEAL
You may have spent only a day or so on the prospect thus far, but if it’s still of interest, you should now devote substantially more time to preliminary due diligence: a focused period of rapid learning in preparation for making an offer. You’re looking for any reason that you might not want to acquire this business.
Use the company’s historical financial data to project future earnings and your return on investment. These calculations will allow you to value the firm as accurately as possible — and thus to arrive at an offer price, typically between three and five times the current earnings before interest, taxes, depreciation and amortization, or EBITDA. Visit banks and approach your investor network to raise money for the acquisition.
Especially if you’re competing against other interested parties, this is also the time to persuade the seller that you are the right buyer.
If your offer is accepted, you’ll enter a period of confirmatory due diligence in which the company’s records will be fully open to you. You will typically have around 90 days to work with your accountant and attorney to check for any inconsistencies and red flags.
TRANSITIONING INTO LEADERSHIP
After closing the sale, you should focus on four tasks: introducing yourself to all your managers and employees, meeting with external stakeholders, communicating the transition plan to everyone and taking control of your cash flow. If you have a management transition arrangement with the former owner, be clear with both employees and customers about how it will work.
The weeks after closing will be exciting, busy and filled with learning. You’ll be pulled in more directions than even an extended business day can accommodate.
Growing pains are inevitable. If you have approached the acquisition process thoughtfully and begun to apply good management, things will soon settle down. And then you’ll be able to focus on growing your small business into a successful medium-sized — or even large — one.
